SAN CARLOS, United States — About 20 minutes south of San Francisco, in a strip of low-rise offices off the highway and up a scraggly road lined with pickup trucks and vans, there is room filled with zillion-part microscopes, tube-sprouting machines and glowing cylinders. A lab straight out of the 1985 indie nerd comedy “Real Genius,” perhaps. Here, though, they’re not just tinkering, they’re growing things: diamonds.

The lab’s owner, Diamond Foundry, launched by chief executive Martin Roscheisen and his team of M.I.T., Stanford and Princeton engineers, is one of several start-ups aiming to shake up the diamond industry with manmade stones that are indistinguishable — and identical in chemical composition — to those found in nature.

“Growing diamonds of these pristine colours, that high degree of purity, is actually very hard,” Roscheisen says, using industrial-size tweezers to pick up a 3-carat-plus manmade diamond. “Each of these diamonds is unique. They have their own growth patterns. No two diamonds we produce are alike, pretty much exactly like mined diamonds,” he continues. “Some people think it takes 2 billion years for a mined diamond to form on earth. In truth, it’s about the same formation speed — a week or two. They are just stuck in the soil for many years.”

The exact process by which Diamond Foundry diamonds are made is in part proprietary, but Roscheisen explains that they use a specially designed plasma reactor that nudges an existing diamond to grow in size. Think of a diamond as a tomato, which can be grown more reliably in a greenhouse than in a backyard garden. And just like tomatoes, diamonds must start with a seed. The Diamond Foundry uses a natural diamond as its growth base and the new gemstone swells from there.

Diamond Foundry has several competitors, including New Diamond Technologies in St. Petersburg and IIa Technologies in Singapore. In April 2016, crystal company Swarovski introduced its own "created" diamonds, and South African diamond conglomerate De Beers also has a brand called Element Six that grows manmade stones.

Currently, manmade diamonds account for just 1 percent of the $14 billion global rough diamond market, according to an August 2016 report by Morgan Stanley. However, the product's market share could expand to 15 percent of gem-quality melee diamonds — commonly referred to as "diamond chips" — and 7.5 percent of larger diamonds by as early as 2020.

Yet few of these firms are selling their product to retail consumers. Instead, they are largely focused on industrial applications.

“Diamond-tech is where they feel the money is,” explains Paul Zimnisky, an independent diamond industry analyst. “[Some] are using the diamond jewellery industry as the market to test and develop their technology.” But while Roscheisen and his team initially set out to create diamonds for high-tech industrial applications — including semiconductors and renewable energy — Diamond Foundry soon pivoted to jewellery when diamond polishers from India and others began to enquire after their supply.

Inside the Diamond Foundry lab. | Source: Diamond Foundry

“Business or investment wise, there are some segments that are kind of overrun. The best businesses are when you connect the dots in some areas that are underinvested,” Roscheisen says. “Certainly Silicon Valley is not doing much with fashion, no? We started looking into this and felt, it’s pretty amazing that this a really serious business where people make a lot of money. In some sense, it’s technologically underinvested. There is a lot of value in connecting the dots, because few people can do it.”

The most obvious consumer benefit to lab-grown diamonds is that they are not tainted by the ethical issues that have long surrounded diamonds, captured by the popular Hollywood film “Blood Diamonds” which dramatised the dark side of so-called “conflict diamonds,” named after their role in financing bloody wars.

This opportunity is part of the reason why Diamond Foundry has attracted just under $100 million in funding, with bold-faced backers including actor and activist Leonardo Dicaprio (who starred in “Blood Diamond”) as well as Silicon Valley insiders like Alison and Mark Pincus, who co-founded One Kings Lane and Zynga, respectively.

The start-up has also developed close ties with the fashion community because of early investor Jean Pigozzi. He introduced Roscheisen to industry insiders including public-relations powerhouse Karla Otto, who serves as a brand advisor. Other notable advisors include Miroslava Duma (who is also an investor) and Wendi Murdoch.

But Diamond Foundry, like other diamond suppliers, is facing a challenging market. For one, the value of diamonds is falling. Diamond conglomerate De Beers, which supplies 40 percent of the market, reported that the average price per carat in 2016 was $187, down from $207 in 2015. However, the earnings margin on these rocks was up slightly — 23 percent in 2016 from 21 percent in the prior year — which De Beers attributed to sustained demand in the United States as well as growth in China, which offset a decrease in demand in other regions.

A large slice of diamond revenues is still linked to retail sales of engagement rings, which are often priced hundreds of percent higher than their resale value, as documented in a landmark 1982 Atlantic article: "Have You Ever Tried to Sell a Diamond?” The market is underpinned by a clever marketing narrative first invented by De Beers in the 1950s that connected engagement with diamonds, which masks the fact that diamonds are actually much less scarce than most people believe.

But social mores around marriage are shifting, especially in the West, putting pressure on diamond suppliers. In the United States, the world’s largest consumer diamond market, the median marrying age in 2014 was 27 for women and 29 for men, up from 20 for women and 20 for men in 1960. That same year, 53 percent of unmarried adults said that they would like to be married one day, down from 61 percent in 2010. And only 28 percent of 18-34-year-old adults — those born after 1981 — were married, a 40 percent drop from Baby Boomers during the same period in their lives.

On the flipside, the average sum of money spent on an engagement ring increased in 2015 to $5,871, up slightly from $5,855 in 2014, according to a survey by The Knot, a wedding planning website. But individual retailers tell a different story. Before it was acquired in November 2016 for $500 million by a group of funds managed by Bain Capital Private Equity and Bow Street LLC, online diamond jeweller Blue Nile announced that net sales of engagement rings in the US were down in its last reported quarter to $59.5 million, an 8.5 percent decrease year-over-year. At Tiffany and Co, sales of engagement rings were down 3 percent in the first three quarters of its 2016 fiscal year.

To be sure, many analysts remain positive about the diamond market. “For the next three years, the supply of rough diamonds is expected to maintain a tight balance with demand,” according to a December 2016 report by Bain & Company, a management consulting firm. “We expect demand for rough diamonds to recover from the recent downturn and return to a long-term growth trajectory of about 2 percent to 5 percent per year on average, relying on strong fundamentals in the US and the continued growth of the middle class in China and India.”

However, Bain suggests that the supply of rough diamonds will decline in value by 1 to 2 percent annually through 2020 and that the softening of the Chinese market — fueled by stricter regulations around gifting — could continue despite the growth of its middle class. The casualisation of dress is another factor. “People are dressing down, especially for occasions,” says diamond industry analyst Edahn Golan. “It’s fine, it looks great, but you won’t wear a $10,000 diamond necklace with a $100 dress from H&M.”

In the face of these challenges, diamond suppliers are adjusting their marketing. De Beers used to do the heavy lifting for the rest of the industry when it came to advertising. But its shrinking market share compelled the firm to shift all of its messaging — including its ubiquitous “A Diamond Is Forever” slogan — to its own brand, Forevermark.

In May 2015, seven of the world’s largest diamond mines formed the Diamond Producers Association, a new trade group, to supplant that loss. An ad that’s part of its ongoing “Real Is Rare” campaign ran during the 2017 Oscars. “If you look at that advertisement, it’s basically two Millennials that are free-spirited life partners,” Zimnisky notes. “Instead of the girl having a solitaire ring, she has a diamond pendant on. It reflects the shift in demand, starting in the West.”

But about a third of diamonds bought by female Millennials in 2015 were self-purchased, according to De Beers. And while traditional diamond brands and retailers have organised their marketing schedules around gifting holidays and special occasions, from engagements to Valentine’s Day to Mother’s Day, these tactics are decreasingly effective.

To ensure Diamond Foundry would capitalise on self-purchasing, Roscheisen acquired Los Angeles-based, direct-to-consumer fine jeweller Vrai & Oro in November 2016. Founded in April 2014 by Vanessa Stofenmacher as the industry’s answer to Everlane, the startup's minimalist, reasonably priced pieces were generating $3 million in sales by its third year in business, approximately 70 percent of which came from clients shopping for themselves.

“We’re working more with women since they are the ones buying the jewellery, not trying to target men to buy for women,” says Stofenmacher, sitting in her naturally lit, white-washed loft in Downtown Los Angeles’ Jewellery District.

Now we kind of have this integrated entity that is sort of the West Coast answer to both De Beers and Tiffany.

At first, the partnership between Vrai & Oro and Diamond Foundry was purely transactional. Stofenmacher wanted to source stones responsibly, and Diamond Foundry was the only sure bet. (Every piece of new Vrai & Oro is slated to be made with Diamond Foundry stones only by April 2017.) However, as she began using the Diamond Foundry’s product, the complementary nature of their companies became more clear. Diamond Foundry has positioned itself as both a supplier and a consumer-facing alternative to Blue Nile or De Beer’s Forevermark. What it lacks, however, is a strong brand.

“We could have started to hire people with jewellery and marketing backgrounds, but we felt like this was a great fit and thought, ‘Let’s make her an offer she can’t refuse,’” Roscheisen explains. “Now we kind of have this integrated entity that is sort of the West Coast answer to both De Beers and Tiffany. It’s easier to establish something new, with a clean team, than hiring and firing yet another designer at Tiffany. That’s what we’re banking on.”

Vrai & Oro jewellery. | Source: Vrai & Oro

For younger consumers, Stofenmacher says the ethics of diamonds are important; for a more mature customer, it’s more about quality and convincing them of the value of a manmade diamond. “The industry calls them synthetic stones, but for me that’s a misleading term,” she adds. “It’s educating them that this is the exact same material, we’re just changing the environment in which it grows. It’s not changing the product, it’s changing the process.” In early summer, Stofenmacher will open Vrai & Oro's first retail store in Los Angeles' Arts District so that consumers are able to experience the product first hand. (At present, she holds by-appointment sessions in the company's showroom.)

At present, about a third of Diamond Foundry’s business comes from direct-to-consumer sales; two-thirds is business-to-business. The company declined to disclose revenue, but says it produces 4,000 carats of rough diamonds each month. “We’re the fastest-growing company in luxury. Period,” says Roscheisen. “We’ve doubled revenue every quarter last year. We tripled in the fourth quarter. And now we’re doubling in capacity, with software-type gross profit margins.”

But to win with consumers, Diamond Foundry needs to focus more sharply on its brand proposition. “It’s brand that is driving the value,” explains Zimnisky says. “It’s very expensive to build that brand through advertising.” This is perhaps where Roscheisen’s dalliances with the fashion industry may serve him best.

Thanks to his relationships with well-regarded insiders like Duma, he has managed to embark on branded partnerships with the likes of Barneys New York, which commissioned designers on its roster — including Eva Fehren, Nak Armstrong and CVC Stones — to produce pieces made with Diamond Foundry rocks. In the autumn of 2017, a larger collaboration is slated to launch, although Roscheisen declined to disclose his partner.

Regardless, analysts agree that for Diamond Foundry to scale quickly, it will need the endorsement of a major jewellery brand in order to legitimise its own. “You really need a distribution system,” Zimnisky says. “For a company like the Diamond Foundry to be financially successful, they are going to have a challenge when it comes to building that brand.”

We ought to just raise our prices and sell our diamonds like organic food at Whole Foods, which costs more.

What’s more, it’s unclear whether or not the value of the manmade diamonds will match up with that of mined diamonds in the eyes of the consumer. “If you compare man making of diamonds and mining, mining is the ultimate industrial mass production. It happens at a scale unlike any other human activity,” says Roscheisen. “We grow diamonds atom by atom, using very complex semiconductor-type tooling. With mining, you just have to send in more trucks."

"What we see already is that the relative demand for our product is larger than the supply,” he adds. “We ought to just raise our prices and sell our diamonds like organic food at Whole Foods, which costs more.”

But many analysts believe the price of manmade diamonds may have to be cut dramatically to attract consumers. “We’ve seen it with the other precious gems: ruby, sapphire, emerald. You could buy a nice, one-carat, lab-created ruby for $75 at Kay Jewelers when an equivalent, natural ruby of similar quality is going to pretty much cost you what a diamond would: thousands of dollars,” Zimnisky says. “For synthetic diamonds to really compete [on] the level with naturals, they need to build a brand like Mikimoto did with [cultured] pearls. Unless that happens, the economics probably won’t work.”

“The market is going to go towards a place where, if you don’t want to spend much, it makes sense to buy a lab-grown diamond,” Golan adds.

Yet Roscheisen remains convinced: “Culturally, the desire for something that transcends time...these desires don’t go away, they’re very constant.” Stofenmacher, too, is bullish. “Consumers are demanding transparency. They’re not looking for it, they’re demanding it. And if they don’t get it, that’s where you’ll see alternative stones or no engagement ring because they’re not willing to stand behind the practice of a conflict diamond, or these marketing tactics that suggest ‘You need a diamond for true love,’ or what have you,” she says.

“People are questioning things,” she continues. “I think it’s about providing something that stands for their values. For me, it’s not about it being the rarest stone on earth because it’s not the rarest stone on earth. A diamond still holds a lot of symbolism.”

Disclosure: Lauren Sherman travelled to Los Angeles and San Francisco as a guest of Diamond Foundry.